Renaissance Capital -

Full-scale military action began last night (7 Aug) in Georgia's breakaway region

􀂃 So far there has been limited evidence of direct military support by Russia of the Russia-backed rebels

􀂃 The UN Security Council has failed to reach an agreement on issuing a statement

􀂃 The Russian Security Council has convened

􀂃 Russia has promised to take action in response to what Prime Minister Vladimir Putin called "aggressive Georgian action"

􀂃 Georgian President Mikheil Saakashvili has ordered the full mobilisation of troops in response to what he calls "largescale military operations by Russia"

􀂃 We expect Russia to get involved, but the scale of direct military involvement remains unclear

􀂃 We expect a further deterioration of the situation in the region

􀂃 We expect Russian assets to continue to suffer. We particularly expect a decline in the rouble and widening of CDS spreads, which is likely to apply pressure to Russian stocks and bonds

􀂃 However, we think that, with fundamentals remaining solid, any sell-off is likely to be reversed in a matter of days and weeks, with the timing dependent on the scale of Russian involvement

According to Reuters, today (Aug 8), the UN Security Council failed to reach an agreement regarding a Russian statement that would have called on Georgia and separatists in its South Ossetia region to immediately stop any bloodshed. Security Council members began meeting late Thursday (7 Aug) and remained behind closed doors for two hours until early Friday morning to discuss the three-sentence statement.

However, council diplomats said one phrase was unacceptable to the Georgians; this was backed by the US and Europe. That wording called on all sides in the conflict "to renounce the use of force," according to a draft of the text. After failing to agree, the council decided not to take any action on the issue, the diplomats said.

However, they agreed to hear statements from Russia and other individual council members and Georgia.

On Thursday, Georgia and South Ossetia accused each other of aggressive actions.

According to Georgian authorities, South Ossetian forces attacked Georgian villages and injured two Georgian peacekeepers while South Ossetian authorities reported several casualties and six civilians wounded. After visiting the injured peacekeepers in hospital, Saakashvili said that Georgia wanted to resolve the crisis in a peaceful manner and called on South Ossetia to cease fire. The Georgian Minister of Reintegration Temur Yakobashvili called the incident an attempt to drag Georgia into war. Georgia denied Russian peacekeepers' reports that Georgian SU-25 fighters and surveillance aircrafts were flying over South Ossetian territory and that a Georgian brigade was being positioned on the Georgia-South Ossetia border. The US urged all parties to negotiate an end to the conflict immediately. Georgian troops, backed by warplanes, pounded separatist forces near the South Ossetian capital.

This week, Russia's Ministry for Foreign Affairs said it would not remain neutral if the situation in Ossetia and Abkhazia became more acute. The ministry's ambassador, Yuri Popov, is already in the region and has called for a two-party meeting between South Ossetia and Georgia, in which South Ossetia has refused to take part.

Georgia has refused Russia's other offer of a four-party meeting between Russia, Georgia, South Ossetia and North Ossetia, claiming it would be ineffective. Russian authorities say they hope the matter will be settled before a war breaks out.

Interfax reported that, this morning, Georgian troops entered Tskhinvali, the capital of the breakaway region of South Ossetia, after battling separatist forces overnight.

Interfax quoted its correspondent as saying a heavy battle was raging in the southern part of the town. He said Georgian forces had not yet entered Tskhinvali, but were engaged in a battle with two convoys of trucks that had entered South Ossetia from Russia and were trying to reach the breakaway capital.

Putin said in Beijing that Georgian troops were leading fire from three positions, backed by tanks. He also announced that three Russian peacekeepers were wounded and their headquarters damaged during the Georgian shelling of Tskhinvali. In addition, Popov said that Georgia "initiated war in South Ossetia".

Konstantin Kosachev, the chairman of parliament's Foreign Affairs Committee, said that Georgia's actions ultimately contradicted its commitment not to use armed forces in the region. Russian President Dmitry Medvedev is said to have discussed pressing measures, based on a mandate to protect local civilians, national interests and restore peace. He has called a Russian Security Council meeting on South Ossetia.

The crisis has fuelled fears of a full-blown war in the region, which is likely to undermine Russia's position as a peacekeeper and the guarantee of stability in the region.

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